What California Form 565 Is For
Form 565 is an information return used to show how a partnership’s income and deductions are divided among its partners. It works with the federal Form 1065, since California starts with federal figures and then applies state adjustments. Partnerships also use Schedules K and K-1 to report partner-level details, including ownership percentages and items such as dividends, rents, and other income categories.
Most entities filing Form 565 are general partnerships, limited partnerships, limited liability partnerships, or foreign alliances that operate in California. Limited liability companies classified as partnerships usually file Form 568 instead, unless they meet specific exceptions. The form helps partners report their share of activity on their tax return, as required by California law.
When You’d Use California Form 565
Partnerships must file Form 565 when they engage in trade or business within the state or earn California-source income. Foreign partnerships have filing requirements when they register with the Secretary of State or have income connected to California. Multimember LLCs taxed as partnerships use Form 565 only when they are not required to file Form 568.
Partnerships also file Form 565 when submitting an amended partnership return to correct an earlier filing or to reflect an adjustment based on Internal Revenue Code rules. A reduced filing program was available in 2017 for certain partnerships not actively operating that year.
Key Rules or Details for the 2017 Tax Year
- California aligned its partnership filing deadline with the federal due date in 2017, which established a March filing deadline for calendar-year partnerships.
- Limited Partnerships, Limited Liability Partnerships, and certain REMICs must pay an $800 annual tax for the taxable year when they do business in California.
- California defines “doing business” as meeting specific property, payroll, or sales thresholds or engaging in transactions for financial gain within the state.
- Partnerships must report ownership percentages in decimal format because California does not allow fractions or percentage symbols.
- Any entity that uses software to prepare its return must file electronically unless it meets a listed exception in state rules.
- California generally follows the Internal Revenue Code, but it has differences in areas such as depreciation and bonus depreciation.
- All partnerships must follow California’s filing requirements when they report income, losses, credits, and adjustments taken from federal schedules.
Step-by-Step Filing Process (High Level)
Step 1—Gather Records
Collect financial statements, partner details, and supporting documentation. Records may include a balance sheet, profit/loss statement, partnership items, and any details related to capital gains or losses.
Step 2—Complete Federal Form 1065 First
Since Form 565 begins with federal numbers, partnerships typically complete the federal return before proceeding to the state form. This includes schedules such as Schedule B and Schedule D, as well as other supporting schedules as needed.
Step 3—Enter Partnership Information
Provide the partnership’s legal entity name, Employer Identification Number, and address. Confirm details about business activities, service types, and questions relating to ownership or changes during the year.
Step 4—Report Income and Deductions
Enter business income, rents, dividends, and other items based on California's rules. Report deductions such as business expenses, interest, and other adjustments. Partnerships may also need to include passive income or rental activities, if applicable.
Step 5—Complete Schedule K
Schedule K shows the total partnership amounts for income, losses, credits, and other items before allocating them to partners. This section ties to adjustments, state rules, and source income.
Step 6—Prepare All Schedule K-1 (565) Forms
Each partner receives a Schedule K-1 for the taxable year showing their share of partnership income, losses, and credits. LLC members and partners use these amounts when completing their California income tax return.
Step 7—Calculate Taxes and Payments
If required, include the $800 annual tax report, detailing prior payments, withholding, or estimates. Partnerships that do not meet the California Revenue and Taxation Code filing threshold are exempt from entity-level tax but are still required to report income.
Step 8—Sign and File
A general partner must sign the return if it was prepared through software and e-filed. Partnerships submitting a paper filing must mail it to the correct state address for Form 565.
Common Mistakes and How to Avoid Them
- Partnerships often miss or submit incomplete Schedule K-1 forms, but they can avoid this issue by creating a checklist to confirm that each partner receives a completed California Schedule K-1.
- Many filers enter ownership percentages incorrectly, yet they can prevent this error by using decimal formatting only and reviewing all entries before filing.
- Some partnerships fail to reconcile Schedule K totals with all K-1 amounts, and they can avoid this mismatch by comparing each line item carefully before submitting the return.
- Filers sometimes forget the required general partner signature, but they can prevent this by assigning signing responsibility early and confirming the signature before filing.
- Partnerships occasionally overlook the need to amend their return after IRS adjustments. Still, they can remain compliant by reviewing federal changes as soon as they are issued and filing a corrected California return when necessary.
- Entities prepared through software sometimes submit a paper return, even though e-filing is required, and they can avoid rejection by verifying their filing method before submission.
- Some filers send the return to the wrong address, but they can prevent delays by checking the most current mailing instructions on the Franchise Tax Board website.
What Happens After You File
After you file Form 565, the Franchise Tax Board reviews the return and may request additional information if something is missing. Partnerships should keep records for at least four years to support the income, deductions, and credits reported. Each partner uses the Schedule K-1 amounts on their own California income tax return, including any California-source income.
Penalties or interest may apply if the return is late, incomplete, or unpaid, so keeping proof of payments is advantageous. Partnerships with non-resident partners may also need to comply with withholding rules. The return may be selected for audit, and organized documentation can make the process easier.
FAQs
Do LLCs taxed as partnerships file Form 565 or Form 568?
LLCs taxed as partnerships usually file Form 568, unless they meet exceptions for foreign partnerships with limited activity.
What does “doing business” mean for California filing purposes?
It includes engaging in transactions for gain or meeting sales, payroll, or property thresholds as specified by state rules.
When should a partnership file an amended Form 565?
File an amended return when correcting errors or reflecting federal changes issued by the Internal Revenue Service.
Can the $800 annual tax be deducted as a tax credit?
No, the partnership cannot deduct this tax or allocate it to partners as a business deduction.
What happens if we use the wrong address when mailing the return?
Using an incorrect address can delay processing and may result in notices or late-filing issues.
